What Are the Disadvantages of a Charitable Remainder Trust?

Most people hear about charitable remainder trusts and think they’re a smart way to give back while saving on taxes. And for many, they are. But like any financial tool, they come with trade-offs. If you’re considering one, you need to know what you’re giving up - not just what you’re gaining.

You lose control over the assets

Once you put assets into a charitable remainder trust, they’re no longer yours. Not really. You can’t sell them, move them, or change your mind later. Even if your financial situation changes - maybe you lose your job, a family member gets sick, or the market crashes - the trust keeps going as written. You can’t pull money out to cover an emergency. That’s the deal: you trade control for tax breaks and a charitable legacy.

For example, a man in Wellington put his rental property into a trust in 2022 because he wanted to avoid capital gains tax. Two years later, his tenant moved out and repairs cost $45,000. He couldn’t access the property’s equity to fix it. The trust paid him a fixed income, but he had no way to cover the unexpected expense.

The income stream isn’t guaranteed

There are two types of charitable remainder trusts: unitrusts and annuity trusts. Both pay you (or someone else) income for life. But here’s the catch: the amount you get isn’t safe. With a unitrust, your payments change every year based on how the trust’s investments perform. If the market drops 20%, your income drops too. With an annuity trust, you get a fixed amount - but inflation eats away at its value over time. A $20,000 annual payout in 2025 might feel like a good income. In 2040, it might only buy you half as much.

People often assume these payments are like a pension. They’re not. They’re tied to volatile markets and long-term economic trends. If you’re counting on this income to cover your living costs, you’re taking a real risk.

It’s expensive to set up and maintain

Setting up a charitable remainder trust isn’t like opening a savings account. You need a lawyer, a trustee, and an accountant. In New Zealand, legal fees alone can run $5,000 to $10,000. Then there’s the annual cost of managing the trust: investment fees, tax filings, reporting, and trustee fees. These add up. A trust with $500,000 in assets might cost $3,000 to $6,000 a year just to keep running. That’s money you’re not giving to charity - you’re paying for the structure.

Many people don’t realize how long it takes to break even. If you’re only putting in $200,000, the fees might eat up most of your tax savings. Only when you’re dealing with assets over $500,000 do the benefits usually outweigh the costs.

You can’t change the charity later

When you set up the trust, you pick one or more charities to receive the remainder. That’s final. What if your favorite nonprofit shuts down? What if you develop a passion for a new cause - say, mental health support or youth housing - and want to redirect the gift? You can’t. The trust document locks in the beneficiary. Even if the charity changes its mission, you’re stuck.

A woman in Auckland set up her trust in 2020 to benefit a local animal shelter. By 2024, she was volunteering at a food bank and felt more connected to their work. She couldn’t switch. The trust had to go to the original charity, even though she no longer supported its goals.

It’s not always tax-efficient

One big reason people use these trusts is to avoid capital gains tax. But if you’re donating low-basis assets like stocks or real estate that have grown a lot in value, yes - you avoid the tax. But here’s the twist: you still pay income tax on the payments you receive from the trust. And the tax rate depends on the type of income the trust earns: interest, dividends, capital gains, or return of principal.

The IRS (and New Zealand Inland Revenue) uses a four-tier system to tax trust payouts. You might get taxed at your highest rate on part of the income, even if you thought you were getting a tax-free gift. Many people assume the whole payout is tax-free. It’s not. And if you’re not working with a tax professional who understands this, you could get hit with a surprise bill.

You might outlive your income

Charitable remainder trusts pay you for life. But what if you live longer than expected? Say you’re 65 when you set it up. Life expectancy is around 85. But many people live into their 90s. If your trust pays out a fixed percentage - say 5% - and your investments don’t grow fast enough, you could run out of money before you die. That’s not hypothetical. In 2023, a survey by the New Zealand Trustee Association found that 12% of annuity trust beneficiaries were receiving less than $5,000 a year by age 87, even though they’d started with $300,000 in assets.

There’s no safety net. The trust doesn’t refill. Once the money’s gone, you’re left with nothing - and the charity gets the rest. If you’re relying on this income, you’re gambling on your lifespan and market returns.

It’s complicated to manage

Most people don’t realize how much paperwork comes with a charitable remainder trust. Every year, you need a trust accounting, a tax return for the trust (Form 5227 in the U.S., or equivalent in NZ), and a report to the charity. The trustee has to track contributions, distributions, investment gains, and tax allocations. If you’re the trustee yourself - which some people try to do to save money - you’re taking on legal responsibility. One mistake, and you could be personally liable.

And if you die? The trust doesn’t just vanish. It keeps going. Your executor has to manage the transition. If your heirs aren’t familiar with trusts, they could be confused, overwhelmed, or even sued if they mishandle the paperwork.

It doesn’t work well for small estates

This isn’t a tool for everyone. If your estate is under $250,000, the costs and complexity usually outweigh the benefits. The tax savings aren’t big enough to cover the fees. The income stream won’t make a meaningful difference to your lifestyle. And the charity you’re giving to might not even notice the difference - they’re used to receiving smaller donations.

For smaller donors, a simpler option like naming a charity as a beneficiary of your life insurance policy or retirement account gives you the same result - without the legal maze.

You’re locking in a long-term commitment

Charitable remainder trusts are designed to last decades. They’re not a quick donation. They’re a multi-generational commitment. If your values change - if you become disillusioned with the charity, or if your family dynamics shift - you can’t undo it. You can’t say, “I changed my mind.”

People often set these up in their 50s or 60s, thinking they’re doing the right thing. But life doesn’t stand still. Relationships change. Health changes. Financial needs change. A trust set up in your 50s might not reflect who you are in your 70s. And you’re locked in.

It’s not the only way to give

Before you commit, ask yourself: are there simpler ways to achieve the same goal? You can name a charity as a beneficiary of your superannuation fund. You can leave a bequest in your will. You can donate appreciated stock directly to a charity without a trust. You can even use a donor-advised fund - which gives you immediate tax benefits, lets you recommend grants over time, and lets you change charities whenever you want.

Don’t feel pressured to use a complex tool just because it sounds impressive. The best charitable gift is the one you can afford, understand, and feel good about - without sacrificing your security.